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Annual Tax on Enveloped Dwellings – A Guide

Author

Sharon Collier

An experienced Chartered Tax Adviser and Trust and Estate Practitioner, Sharon joined ETC Tax in September 2016.

Annual Tax on Enveloped Dwellings (ATED) is an annual tax charge, which is levied on high value residential properties (“dwellings”) held by certain non-natural persons (i.e. held within a so-called “envelope”).

The charge has applied since 1 April 2013. It was introduced as part of a package of measures aimed at making it less attractive to hold high-value UK residential property indirectly, in order to avoid or minimise taxes.

Annual Tax on Enveloped Dwellings (“ATED”) applies to residential properties held in companies, partnerships which have a corporate member(s) and also collective investment schemes, such as unit trusts or open-ended investment companies (“OEIC”).

When it was first introduced, the charge was levied on UK properties with a value of more than £2 million in April 2012. Subsequent changes have extended the scope of the charge to lower value properties. It is now levied to properties with values above the following thresholds:

  • £2 million on 1 April 2012, or at acquisition if later, for returns from 2013 to 2014 onwards
  • £1 million on 1 April 2012, or at acquisition if later, for returns from 2015 to 2016 onwards
  • £500,000 on 1 April 2012, or at acquisition if later, for returns from 2016 to 2017 onwards

Statistics released in early 2017 show that ATED raised £178 million in 2015-16 (when the threshold property value was £1 million). 97% of the receipts were in relation to properties in London and the South East. In fact 80% of the receipts related to properties in the City of Westminster and Kensington and Chelsea. The reduction in the threshold to £500k from 2016/17 tax year may of course mean that properties from a wider range of areas will be brought within the scope of the tax.

The detailed rules are quite complex. The HMRC technical guidance note on the topic runs to 90 pages! By necessity therefore this article is an overview of the main provisions.

How much is Annual Tax on Enveloped Dwellings?

The amount you will need to pay is worked out using a banding system based on the value of your property. The table below shows the bandings of property values and the amount of the charge.

Chargeable amounts for 1 April 2017 to 31 March 2018:

Property valueAnnual charge
More than £500,000 but not more than £1 million£3,500
More than £1 million but not more than £2 million£7,050
More than £2 million but not more than £5 million£23,550
More than £5 million but not more than £10 million£54,950
More than £10 million but not more than £20 million£110,100
More than £20 million£220,350


What is a “dwelling” for the purposes of Annual Tax on Enveloped Dwellings?

Annual Tax on Enveloped Dwellings is chargeable on single dwellings – effectively a single unit of residential property. A property is a dwelling if all or part of it is used, or is suitable for use, as a residence, for example, a house or a flat.

Certain types of living accommodation are specifically excluded. These include:

  • residential accommodation for school pupils
  • residential accommodation for students
  • residential accommodation for members of the armed forces
  • an institution that is the sole or main residence of at least 90 per cent of its residents
  • a home or institution providing residential accommodation for children
  • a home or institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder
  • a hospital or hospice
  • a prison or similar establishment
  • a hotel or similar establishment

ATED returns

If a property falls within ATED, an annual return must be submitted to HMRC. Each return is made up for a period from 1 April to 31 March. The return, together with the tax due, must be submitted within 30 days of the end of the return period i.e. by 30 April.

The flowchart below will assist you in understanding whether you have a requirement to file an ATED return:

Is an ATED return required

 

  • Note 1

The £500,000 figure is the threshold for 2016/17 and 2017/18 returns. The valuation date to be used is 1 April 2012 if the property was owned then. If the property was acquired later then it will be the value on the later date of acquisition.

Valuations for Annual Tax on Enveloped Dwellings purposes are used for 5 years. Properties will therefore need to be revalued as at 5 April 2017, for the purposes of ATED. This valuation date will then apply to ATED returns for the 5 years commencing on 1 April 2018.

Whilst a formal valuation is not required, HMRC will require a valuation to be robust and reasonable, and can raise enquiries.

This valuation date will then apply to ATED returns for the 5 years commencing on 1 April 2018.

It is also possible to obtain a Pre-Return Banding Check (“PRBC”) from HMRC if your property valuation falls within 10% of a banding threshold. They will either agree the banding you have chosen or tell you they do not agree with your value banding and let you know what the right banding should be.

Due to the tight 30 day deadline for submitting a return you may need to submit your return before you get a response on the PRBC. You should do this based on your estimate, prior to the deadline, to avoid penalties but you may need to amend the return subsequently if HMRC do not agree the valuation banding.

  • Note 2

The property itself can be specifically exempt as set out above. There are also circumstances in which the entity owning the property is exempt (for example if it is a charity or a public body).

  • Note 3

See the various ATED reliefs set out below.

ATED reliefs

There are various reliefs available against the Annual Tax on Enveloped Dwellings charge. However, even if you are eligible for one of these reliefs and there is no tax payable, you must still submit a return and make a claim for the relief by completing a Relief Declaration Return. The same deadline date of 30 April applies. These returns can be completed and submitted to HMRC online.

To be eligible to claim a relief against ATED, the property must be either:

  • Let to a third party on a commercial basis and not be available for occupation by the owner or anyone connected with the owner at any time;
  • Open to the public on a commercial basis for at 28 days or more in a year i.e. stately homes;
  • Being developed for resale by a property developer;
  • Owned by a property trader as the stock or for the sole purpose of resale;
  • Repossessed by a financial institution as a result of its business of lending money e.g. equity release schemes;
  • Used by a trading business to provide accommodation to employees with less than a 10% interest in the company;
  • A farmhouse occupied by a farm worker or former long-service farm worker;
  • Owned by a registered provider of social housing.

If you fail to complete the ATED return by 30 April various penalties will apply, which follow the self-assessment rules:

  • Initial penalty of £100 for the late submission of the return;
  • Daily penalties of £10 per day, after your return is three months late.

If your return is six months late, a further penalty of £300, or 5% of HMRC’s estimation of your liability to the ATED tax (whichever is higher) will apply. A second further penalty of £300, or 5% of HMRC estimation of your liability to the ATED tax, (again, whichever is higher) will apply if your return is 12 months late.

The table below summarises the penalty position in relation to late filing of ATED and/or relief declaration returns for the period ended 30 April 2017:

PenaltyDatePenalty amount
Missed 30 April 2017 filing deadline (initial fixed penalty)1 May 2017£100
Three months late (daily penalty of £10 per day for 90 days)1 August 2017£900
Six months late (further fixed penalty)1 November 2017£300
Twelve months late (further fixed penalty)1 May 2018£300

 

Note: If any ATED tax is due then tax-geared penalties will also be applied.

Enterprise Tax Consultants can help you with Annual Tax on Enveloped Dwellings 

HMRC appear to be taking a very strict position on charging penalties for late returns even where there is no tax due. It is therefore important for you to review your own position to find out whether the reduced ATED threshold has any impact for you and your business.

The requirement to submit returns even where there is no tax due because of the availability of reliefs can be overlooked. If in any doubt, contact one of our specialist tax advisers.

Contact us for a no-obligation initial conversation with an experienced tax adviser.

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